Buying vs. Leasing: Which Is Best for You?

Getting your hands on a new vehicle is a multi-stage process. With the inevitable excitement it brings, deciding whether to buy or lease the car is a tricky decision for some. There's no right answer. Instead, it’s important to assess the benefits and downsides to each and evaluate which is the right choice for you.Generally speaking, leasing allows you to get a more expensive car for the same monthly payment than if you were purchasing. Leasing also has a tax advantage, since you're paying tax only on the amount of the car you use, rather than the entire purchase price. However, since you're essentially borrowing the car from the leasing company, you're responsible for excess wear and tear and mileage. If you're the fastidious type who keeps a car pristine, doesn't drive more than 10,000 to 15,000 miles a year, and simply wants a more upscale vehicle than you would be able to afford by buying it outright, then leasing might be for you.

But there’s a little more to it than that. Let’s consider our two options of buying and leasing in terms of monthly cost/benefit for the driver. If the buyer sells the car after the loan is paid in full (or trades it in) and the lessee returns the car at the end of their lease, then the cost/benefit of each is roughly equal as long as the residual value assigned in the lease was accurate. However, if the buyer of a car keeps the vehicle for longer than the term of the loan, then the balance tips in favor of purchasing. Owning the vehicle beyond the term of the loan means the financing is actually amortized over a longer period of time. This makes the lease a losing proposition by comparison, simply because the buyer has a tangible asset, that is, a car to drive, while the lessee was only borrowing that asset for a set period of time.

That comes to the crux of the matter. At the end of a loan, you actually have something tangible: a car, even if it’s several years old and not worth nearly as much as it was new. However, at the end of a lease you have…nothing. Now, it's possible that you took the money you saved from your lease and put it into a mutual fund or something, but perhaps in reality, you spent it on more frivolous things.

So which is better? Well, what kind of person are you? A lease will allow you to drive a new car every few years, with the latest safety gadgets, a warranty, and all the joy that comes from that new-car smell. It'll cost you more in the long run because you won't ever own a vehicle outright, but if you're willing to pay that, then leasing may be the right choice. Remember that living up to your lease agreement will save you time and money should you decide to take this route.

On the other hand, if you're willing to make a bigger payment, don't mind paying out of pocket for repairs once the warranty expires, plan to keep your car after the loan is paid, like to customize your cars or simply drive a lot every year, then buying is probably more for you.

Additional Financial Considerations

Don't forget about insurance. It's easy to ignore when you're staring at all that shiny sheet metal, but insurance is mandatory if you're financing or leasing, and if you have a bad driving record, are looking at cars that have a high theft rate or are simply cursed with youth, your insurance can wind up costing you a bundle. Like anything regarding a car purchase, shop around for the best coverage at the best rate, and keep in mind that no matter what, some cars are going to be more expensive to insure than others. Esurance, Progressive, and Geico can all give quotes online in a few minutes, and there are plenty of other places such as your own insurance agency to find a good rate.

When negotiations begin, dealers want to know your expected monthly payments so they can get you the most car for the money – or at least some favorable loan terms. Always build your anticipated insurance and gas costs to this amount. It’s easy to forget that those two things can add up to an extra $100 or more a month.

Take your time considering your options. This is a big financial decision, and it’s worth weighing the pros and cons of both choices.